Budget plan sparks tax tiff

WilliamL. Watts

WASHINGTON (MarketWatch) -- Setting up a long-running battle over tax policy, the Senate Budget Committee on Thursday approved a blueprint that Democrats say will balance the federal government's books by 2012 through strict budget rules and a crackdown on people and corporations that don't pay taxes that they owe.

Senate Budget Committee Chairman Kent Conrad, D-N.D., and other Democrats have insisted that the budget can be balanced without boosting taxes on the middle class, but have warned that any effort to extend President Bush's 2001 and 2003 tax cuts before they expire in 2010 must be offset by spending cuts or revenue boosts elsewhere in the budget.

"We have a reserve fund that says you can extend the expiring provisions if they are paid for. [The budget resolution] calls for new measures to close the tax gap, to shut tax shelters, and address offshore tax havens. It calls for and sets the stage for tax simplification and reform. And it includes no tax increase," Conrad said.

The committee's 12-11 party-line passage of the $2.9 trillion fiscal 2008 budget resolution was expected. The resolution could move to the Senate floor as early as next week.

Expiration date

Congressional Republicans and the Bush administration say Democrats can't reach their goal unless they allow many of President Bush's first-term tax cuts to expire.

"The budget resolution reported by the Senate Budget Committee today assumes a significant tax increase, which is the last thing our economy needs as we work to extend the current expansion," said Treasury Secretary Henry Paulson, in a statement.

The resolution, which is nonbinding but provides guidance to Congress' revenue and spending committees, estimates the federal budget would produce a surplus of $132 billion in 2012, but projects an increase in the budget shortfall from $212 billion in fiscal 2007 to $249 billion in fiscal 2008. The House Budget Committee is set to formally draft its version of the budget resolution next week.

The Senate budget outline ignores many of Bush's proposed domestic-spending cuts, instead boosting spending on measures such as the Children's Health Insurance Program and a range of education and veterans programs. Overall, it rejects around $53 billion in entitlement spending cuts proposed by Bush in his fiscal 2008 budget plan in February.

The plan calls for a $15 billion cut in payments to private insurance companies that provide Medicare coverage.

It also assumes that revenues will rise in 2010 with the scheduled expiration of the Bush tax cuts. The measures can be extended if lawmakers come up with more than $400 billion in additional revenues as offsets. That conforms with pay-as-you-go, or pay-go, budget rules championed by Democrats. Pay-go requires that tax cuts and increases in entitlement spending be rendered budget-neutral by offsets elsewhere in the budget.

Conrad's outline assumes Congress will provide a two-year patch designed to prevent millions of households from falling prey to the alternative minimum tax. The plan assumes lost revenues will be offset elsewhere, but doesn't specify where.

Without action to extend the patch, which expired at the end of last year, it could affect around 23 million households in 2007, including many with incomes of less than $100,000.

The path for policymakers is complicated by the fact that official budget projections assume the AMT will bring hundreds of billions of dollars in revenue in coming years. See recent story.

Mind the gap

The Democratic resolution assumes the government can make substantial progress toward closing the annual tax gap - the amount of money that taxpayers owe but don't pay. The gross tax gap was estimated at $345 billion in 2001.

Republicans scoffed at notions that efforts to trim the gap could be counted on to provide significant offsets.

Sen. Charles Grassley of Iowa, who serves as the senior Republican on the tax-writing Senate Finance Committee, noted that the Democratic resolution and the Bush budget blueprint combined would provide only 5% of the revenues needed to offset the extension of the Bush tax cuts, eliminating the alternative minimum tax and extending popular tax relief measures.

"This budget puts the burden on the Finance Committee to come up with $916 billion in offsets over 5 years, just to pay for extending existing tax policies that expire during that period," Grassley said..

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